Economic growth involves expanding national productive
capacity and an increase in the quantity of goods and
services produced by an economy over time. This should
result in an increase in the standard of living. It is
measured by changes in GDP.
How economic growth increases standard of living
Economic growth means increasing the capacity of
the economy to satisfy people's material needs and
wants.
This should mean increasing living standards if
the increase in productive capacity is faster
than population growth.
A growing economy is in a superior position to
meet new needs and resolve socio‑economic
problems. Growth lessens the burden of scarcity.
However, one can’t assume that greater material
abundance means improved living standards for
all. The extent to which everyone shares in
economic growth is a matter of how well a nation
achieves equity in income distribution.
This means greater material abundance
and a more satisfying resolution of the
economic problem.
Measure of economic growth
Economic growth is
measured by changes in
GDP
Real GDP
Real GDP is a measure of the total output of final
goods & services after adjusting for price changes. This
definition allows for the effect of inflation.
Real GDP per capita
In this measure of economic growth, both inflation and population
growth are taken into account . If real GDP per capita increases, the
standard of living increases
Weaknesses of GDP
as a measure of
economic growth
GDP does not describe how the benefits of
growth (greater income and wealth) are
distributed throughout the community.
Increasing output does not necessarily mean
there is an increase in the standard of living for
everybody (some people are better/worse off
than others)
GDP measures the value of goods and services which are
exchanged in the market, but takes no account of the
non-market production that makes up a significant component
of our welfare such as housework, charity work, voluntary work.
Hence, it understates the true value of output and work
GDP statistics do not measure changes in overseas trading
relationships, particularly the link between the prices received
for exports and prices paid for imports (terms of Trade)
Too much spent on imports and too little
received on exports = loss in money
GDP data measures the traded aspects of material welfare, but
says little about non material (quality of life) aspects of our welfare
such as life expectancy, educational and medical services and even
intangible wants such as freedom of speech
GDP does not measure the cash
economy (unreported transactions)
Sources of
economic growth
The rate of growth is influenced by the
following factors:
The rate of population change
The rate of increase in capital equipment per worker
Technological progress and the application of
new ideas to the productive process
Improvement in the skills and productivity of
the labour force
The size of the natural resource base
The capacity of an economy to change
The willingness of an economy to trade with overseas countries
Supply, demand and allocative factors
affecting growth
Growth depends on:
Expanding productive capacity by:
increasing quantity of resources
improving quality of resources
technological progress which raises productivity
Extent to which nations
utilise productive capacity
which depends on the
efficiency of the economic system
development and expansion of markets
degree and nature of government
intervention in the economy
social, political and cultural environment
Supply factors
cause a rightward shift of the aggregate supply curve
Demand factors
Demand factors refer to markets for the output of production. Economic growth depends on increasing
the sale of goods and services created by the productive process. This depends on developing new and
existing markets, both domestically and internationally. Domestic markets grow with population growth
and social and demographic changes. Overseas markets depend on population and economic growth in
other countries and how open their economies are. The process of opening up of world markets so more
international trade can take place is called Globalisation
Allocative factors
Allocative factors relate to the efficiency of the economic system within a country. Allocative efficiency
refers to how efficiently a nation uses its resources. An efficient economic system produces more goods
and services than an inefficient one from a given quantity of resources, i.e. it achieves higher
productivity. For an economy to be operating on or near its PPF it must be efficiently using its resources.
This means allowing the price mechanism to allocate resources to where the best returns are, i.e. their
most valued uses. It involves removing impediments to the flow of goods and services and factors of
production in product and factor markets
Benefits of economic growth
Increased consumption and expansion of
choice (more wants satisfied). Possible
increase in quality of goods and services.
Therefore, an increase in the standard of
living
Increased employment opportunities which
leads to decreased government expenditure on
unemployment benefits (re-direct elsewhere
e.g. social overhead capital such as community
infrastructure
More equitable wealth distribution due
to more people having higher paying
jobs and therefore, less people are on
low levels of income
Increased technology and increased
efficiency of production methods. This
creates better quality goods and
services, often at cheaper prices
Increased longevity (life span)
because of better health and
education services.
Improved working conditions and job
satisfaction. Employees get tasks done more
efficiently/quickly and therefore, increase
leisure time. Improvements/advancements
in technology results in less strenuous
labour and therefore, working conditions
are improved
Better resource allocation.
Expands capacity to remedy environmental
damage. Advances in technology allow us to
reduce the amount of pollution produced.
Costs of economic growth
structural unemployment and long
term unemployment.
People lose their jobs as they are
replaced by machines/development
the goods they once produced
have become obsolete
some people’s skills are no longer
relevant, have a lack of skills, lack
education
Negative externalities which can
be reduced by the application of
government policies
inflation may increase, both
cost-push and demand pull
people spend more money as they have greater confidence in
the economy. This increase in consumption causes for
shortages to occur which increases prices
people make purchases on credit which increases inflation